All Life Is Problem Solving

One of the hardest things about decision making is distancing yourself enough from the alternative you prefer, to look at its possible side effects, or unintended consequences, and then compare it against other alternatives with both their intended and unintended consequences. The Obama Administration decided to subsidize the big banks, while also allowing them to continue the valuation of their toxic assets at well above their current market value. At the same time it also decided not to take the banks into receivership, break them up, get rid of their toxic assets and sell them off later to private capital, at a profit to the Treasury.

The consequences they expect from this decision are that the Banking System will survive intact, the toxic assets will rise in value to a level high enough to make the banks solvent, and the banks will lend at a level high enough to help end the recession and get people on Main Street, and around the world, back to work. On the negative side, they probably recognized that they’d have both progressive and budget-minded conservative opposition, and would have to defend themselves against the charges of unfairness, and yet another welfare program for the already wealthy, implemented at the expense of the increasingly poor. They probably also thought that their decision would defend the Administration against the charge of socialism and prevent that sort of narrative from gaining traction more broadly than just among the Rush Limbaugh/Michele Bachmann set.

The Administration undoubtedly compared this choice to the consequences of the receivership alternative, which they probably saw as getting lending going again, writing off the toxic assets, reorganizing the banks and the banking system, getting Wall Street conservatives fighting mad for making them absorb the consequences of their own failures, and having to fight off charges of destroying capitalism and free enterprise. They may have thought that fighting a political battle of this kind would jeopardize the rest of their legislative program by making charges of radicalism from the right more credible and playing into the stereotype that the Democratic Party is fundamentally anti-business and anti-free market.

Whether this is a completely accurate reconstruction of the Administration’s thinking isn’t important. What is important is that, whatever their precise thinking, it appears to have ignored some or all of the consequences of their decision that we are now seeing. So, did the Administration anticipate that the big banks would be so determined to maintain their system of outlandishly excessive compensation even during a period when they were subsisting on public funds? Did it anticipate the angry feelings of injustice and unfairness this would engender in large numbers of people who are finding it difficult to make ends meet because of the economic crisis these same folks had created? Did the Administration anticipate that the banks receiving assistance partly for the ostensible purpose of getting lending going again, would, in fact, hold on to that public money in order to shore up their very stressed balance sheets? Did it anticipate that the big banks would actively join with other big businesses to oppose the Employee Free Choice Act (EFCA) by funding anti-EFCA advertising campaigns? Did it anticipate that the big banks would use funds for political contributions to Senators who would later vote to defeat legislation to let homeowners facing foreclosure renegotiate their mortgages under the auspices of bankruptcy courts? Did it anticipate that the big banks would also use funds to oppose legislation to end credit card abuses, including ending usurious interest rates? If the Obama Administration did anticipate these things, did it really think that enduring these side effects of its decision to “save the banks” is better than enduring the political charges of “socialism” or “destroying free enterprise” that would have come its way if it had taken them into receivership. Did it really think that these charges would have jeopardized its legislative program any more than the big banks’ bad behavior does now?

The truth is that Obama’s tilt toward Wall Street and the banks jeopardizes his standing as the representative of working people, and it is that standing he will need, when he needs to go to the well on health care, energy, climate, education, and the further economic stimulus that will most certainly be necessary next fall, considering: continuing job losses, GDP shrinkage, foreclosures, and the economically depressive effects of widespread credit card interest payment increases which will do much, by themselves, to counteract Obama’s middle class tax cuts. In fact, given the negative effects of the Banks on foreclosure rates, economic activity and jobs, and middle class consumption, it’s pretty clear that the Administration’s bank subsidization policy is already a failure, at least with respect to any expectation that may have existed that helping the Banks would help “Main Street” and not just Wall Street.

I think, with the benefit of hindsight, we can see more clearly now, that the alternative of taking the big banks into receivership was far and away the better of the two alternatives. It was better for all of the following reasons. First, had we implemented it, we wouldn’t have had to worry about maintaining the outrageous compensation habits of the financial system, on pain of outstanding traders leaving Bank of America or Goldman Sachs, or any of the other big banks. Why? Because banks in receivership, in the process of re-organization, break-up, and downsizing, don’t need “outstanding traders” to do high-risk trades. Second, had we implemented it, we could have maintained the mark-to-market rules, made the banks recognize the real value of toxic assets, cleaned those toxic assets off the balance sheets, and avoided maintaining the lack of transparency now besetting these large banks. Third, banks run by the Government can immediately begin to lend money to those who need it once again, so had we placed them in receivership as soon as the new administration had taken over, we would long since have had credit flowing to business, students, consumers, and those who want to take advantage of the present market to again buy real estate.

Fourth, there would have much less public opposition to EFCA, because banks in public receivership can’t fund political ads. Fifth, there would be no more abusive credit card behavior by these banks, since Federal managers of the banks could have cut credit card interest rates to at least six percent to correspond much more closely to the Fed’s current near-zero rates for the banks themselves, and also because those same managers could have ended all the abusive late payment penalties, and unfair interest rate hikes, that are standard operating procedure currently. Sixth, banks in receivership would not be objecting to federal legislation that provides for mortgage “cramdowns” when people need it, and contributing to the campaigns of legislators who are willing to vote against such legislation.

Seventh, if we had placed them into receivership, we could now be moving much more quickly to investigate the fraudulent behavior that may have led to to the mortgage crisis in the first place. Eighth, had we placed them into receivership, we would not now be contemplating the overwhelming inequity that stares us in the face, namely the inequity that people whose actions had little or nothing to do with manufacturing the current crisis are suffering from it, while those who had a part in creating it, continue with unaffected and extravagant compensation, due to our fear that we need them to save a financial system that, in fact, needs reconstruction far more than it needs saving. And ninth, and far from least, the banks have had far too much power in our political system for the past twenty years. Things have gotten to the point where Simon Johnson, former Chief Economist at the World Bank has said that the United States reminds him of a third world country because the bankers call the tune in our political system and always get what they want. Banks in receivership can’t be political actors, however, a great advantage for a progressive Administration at this juncture. Receivership temporarily removes their influence in the political system; a respite we badly need right now.

Nor, if we did this, would we have, staring us in the face, remarks by frustrated legislators, that the banks “frankly own the place.” They don’t. We, the people “own the place.” And it’s time to tell the Obama Administration to “put ’em out of business” and take back what we own.